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Common 401(k) Fee Structures

All 401(k) providers impose fees on top of fund expenses, and smaller companies are the ones who are charged the most.

"The fact is, the financial-services industry isn’t donating its services," says David Wray, president of the Profit Sharing/ 401(k) Council of America. Many investors have no idea how their financial adviser is being paid for their services. The lack of transparency makes it easy for financial advisers to charge “invisible” fees. It’s important for investors to realize that the mutual fund in a 401(k) portfolio is in the business of making a profit for clients, but it’s also in the business of making money for the managers and administrators of the mutual fund. 1

According to a recent article by Forbes, the Labor Department recently created the “fiduciary rule” that urges financial advisers to act in the best interests of their clients. But despite the rule, a number of financial advisers steer clients toward “suitable” investments that are the most profitable for the adviser. 1

What are the fees associated with your 401(k)?

43-year-old Max Johnson of Charleston, S.C., recently logged into his 401(k) account to redistribute some of his portfolio holdings. His intent was to shift assets out of the aggressive funds he was currently holding and to put them into index funds instead. Jonathan couldn’t believe how much the move would cost him. To invest in the low-cost Vanguard funds offered in his plan, the plan provider would charge him with a 2.69% annual asset-management fee.

Looking deeper into his plan’s fee structure, he discovered that his 401(k) provider charged additional fees (beyond the fund’s expense ratio) on all mutual funds, ranging from 1.29% on the funds with the highest expense ratios to 2.69% on those with the lowest. He was told that the reason was to cover the costs of the plan, including having a toll-free number, Internet access, investment options from different fund families and broker commissions. Johnson was shocked.

Just how much a company will pay for a 401(k) plan depends on the number of plan participants and the size of their account balances, Wray explains. It comes down to economies of scale: Large companies will bring in more assets than smaller ones, so the cost of running these accounts is dramatically lower. The smaller the company and the lower the account balances within the plans, the more it will cost.

The good news is that many employers cover these costs on behalf of their employees. More than half of the companies surveyed in Hewitt Associates’ "2005 Trends in 401(k) Plans" report said they cover the various fees associated with 401(k) plans. (The survey focused on large companies with an average 14,000 employees.) If you work for a smaller company, though, chances are your 401(k) plan will carry higher investment costs and have fewer investment choices.

What can you do?

The first step is to speak with your plan’s administrator to get a better feeling of what fees you may be paying for your 401(k). You have a right to know what fees you’re being charged for the administration of your investment accounts. If you feel the fees are excessive, you sometimes will have the option of rolling your 401(k) into an IRA (Individual Retirement Account) through a process known as an "in-service distribution." 1

If you don’t have this option, you’ll have to sit tight and focus on ways to increase your 401(k)’s value – and in essence ignore the fees that you may have little or no control over.